Occidental Petroleum (OXY): Buying for Dividends or Growth?

Occidental Petroleum Corporation (OXY) is positioned in stark contrast to some of its rivals. Although the company operates as one of the largest oil and gas producers in the United States, it is also significantly diversified in its operational structure, providing a revenue base across market segments.

Last year, OXY generated $5.48 billion in free cash flow before working capital, and this year, the energy giant is expecting growth. That, coupled with a long history of dividend payments, compels further insight into the stock. Let’s look into it…

Diversification: Does it work for OXY?

Apart from the core consumer base in its oil and gas segment, OXY’s chemicals segment, “OxyChem,” sells basic elements, operating in stable markets with constant demand. In 2023, the company’s adjusted income from the chemical segment came in at $1.53 billion.

While this figure indicated a 39% reduction from the prior year, this exceeded company guidance and nearly matched its second-highest pre-tax income record. This is notable considering the fact that a total complex outage for maintenance was carried out at OxyChem’s Ingleside, Texas, plant in the fourth quarter.

In 2024, the company expects a midpoint income of $1.10 billion for the segment, which is close to its fourth-best year ever, despite challenging market conditions such as PVC price decline and pressure on export prices from China.

Looking beyond seasonal market pressures, the company might reap benefits from significant investment in its OxyChem Battleground facility and other plant enhancement projects, resulting in $300 million to $400 million per year potential increments to its EBITDA upon completion.

A prowess in a niche market such as chemicals could mean significant expansionary success for this energy sector powerhouse, especially since chemicals play a major role in global net-zero ambition, enjoying demand from their usage in approximately 96% of manufactured goods.

OXY is also developing multiple nascent technologies to find fuel solutions aiming toward net zero. One such development is the large-scale carbon capture, utilization and storage (CCUS), which provides a strong likelihood for near-term emission reduction, aligning with the company’s sustainability aims.

Moreover, notable strides in its Low Carbon Venture (LCV) business were reported last year. Primary among them is the acquisition of Direct Air Capture (DAC) technology innovator Carbon Engineering Ltd. for approximately $1.10 billion and the formation of a joint venture with BlackRock, Inc. (BLK) to develop STRATOS, the world’s largest DAC facility, expected to capture up to 500,000 tonnes of CO2 per year.

Besides sustainability, the company’s diversified operations should prevent OXY’s profitability from being highly subjected to oil price volatility. For instance, last year, OXY reported a total adjusted oil and gas income of $6.26 billion, down about 50% year-over-year, while the company’s worldwide sales were 1,222 thousand barrels of oil equivalent per day (MBOE/D), up 5.4% from 2022. A decline in crude prices and higher lease operating expenses caused the comparative downturn in income.

Should Income Investors Be Interested in OXY?

As a longstanding energy giant, OXY has a history of returning capital to its shareholders through dividends, starting from the 1980s. On February 8, 2024, the company’s Board of Directors declared a regular quarterly dividend of $0.22, payable to shareholders on April 15, compared to the previously declared dividend of $0.18. The annual dividend rate going forward is $0.88, yielding 1.45% at the current price level.

However, the company is not shy about slashing its dividend payouts when it faces a cash crunch. Evidently, when oil prices took a hit during the global pandemic, OXY decreased its quarterly dividend from $0.79 to $0.01 per share. Hence, over the past three years, its dividend payouts have decreased at a 4.2% CAGR.

Contrarily, last year, OXY paid $600 million of common dividends as its robust cash flow supported payouts. Additionally, the company is eyeing a massive $12 billion acquisition of CrownRock L.P., expecting to enhance its Permian portfolio by adding 170 Mboed of high-margin, lower-decline unconventional production in 2024 and increasing its free cash flow per diluted share, with a $1 billion increase in the first year.

The acquisition is anticipated to strengthen OXY’s balance sheet and free cash to support a growing dividend. On the other hand, the deal has come under the scrutiny of the Federal Trade Commission (FTC). However, OXY’s Chief Executive Vicki Hollub hopes that the acquisition will close in the second half of 2024.

Bottom Line

Occidental Petroleum is endeavoring to expand through multiple acquisitions, as well as focus on its sustainability initiatives through diversification of its operations. On the other hand, the company remains embedded in the oil and gas sector, owing the majority of its revenues to conventional energy sources. The broader oil market is prone to its ebbs and flows as geopolitical factors shape the course of the commodity market.

The Middle-Eastern conflict has raised concerns about a supply shortage despite the International Energy Agency (IEA) assessing that in the absence of actual supply losses, the oil market is well-supplied this year. IEA expects oil demand to grow by 1.2 million barrels per day (bpd) in 2024, compared to 2.3 million bpd in 2023, due to a sharp drop in gasoline usage.

On the other hand, the OPEC group shows a lot more optimism, expecting demand to rise by 2.5 million bpd this year. It might be a factor that OPEC can influence global oil supply and, by extension, oil prices.

On top of it, Warren Buffett is increasingly betting on OXY this year. Buffett’s investment firm, Berkshire Hathaway, has shown its support for the energy company since its mega-acquisition of Anadarko Petroleum in 2019. After a recent buy of 4.30 million shares, as of February 5, Berkshire owns 248.02 million shares of OXY.

According to Reuters, OXY is exploring a sale of Western Midstream Partners, which has a market value of about $20 billion. This divestment is expected to help the company reduce its debt accumulated through multiple acquisitions. This strategy might help OXY to bolster its balance sheet.

While near-term weaknesses could affect Occidental’s performance, its long-term goals remain set toward further diversification and growth through expansion of operations. In addition, the company is committed to returning value to shareholders through its growing dividend, debt reduction, and a robust capital allocation program to free up cash flow. Hence, the stock might be a portfolio addition now based on both its growth initiatives and dividend payouts.

Is BlackRock's $12 Billion GIP Deal a Golden Buying Opportunity?

Giant private asset manager BlackRock, Inc.’s (BLK) CEO, Mr. Larry Fink, made a modest prediction recently that the global economy might be on the brink of an “infrastructure revolution.” This forecast was made in the wake of BLK’s largest acquisition announcement in over 15 years.

With an initiative to invest in and own infrastructure, BLK is seeking to accelerate growth by announcing its plan to purchase Global Infrastructure Partners for $12.5 billion.

New York-based GIP owns and controls companies in sectors like energy, transport, water, and waste. If the acquisition goes ahead, it will be BLK's largest since it procured Barclays’s asset management business in 2009.

GIP, led by Adebayo Ogunlesi, is considered the third-largest infrastructure investor worldwide, falling behind Macquarie in Australia and Brookfield in Canada. Its assets are quite diverse, ranging from Gatwick Airport to Melbourne’s Port.

The cash and stock transaction between these two investment manager titans is slated for completion in this year’s third quarter, pending federal antitrust approval in the U.S.

This assertive acquisition represents a significant strategic push by BLK into the alternative investment sector, further securing its position as a dominant player in global finance.

Most of GIP's ownership resides with its six founding partners, five of which, including Bayo Ogunlesi (the CEO), will be joining BLK. Consequently, Ogunlesi will be tasked with leading BLK’s forthcoming infrastructure group while also becoming a board member and resigning from his position as the key director at Goldman Sachs.

BLK is strategizing to develop its private market operations, which suggests faster growth and higher possible returns when compared to its core business of trading down-priced passive investment products like exchange-traded funds. This deal will likely augment BLK’s private assets by roughly 30% and double the baseline management fees for its private markets.

With GIP, BLK is purchasing an infrastructure fund manager that manages around $100 billion, with a combined revenue of $80 billion from its portfolio companies.

After finalizing this acquisition, BLK aims to establish a separate Global Infrastructure Partners entity that melds the newly acquired firm with current BLK infrastructure teams.

The newly formed entity is projected to rank as the second-largest private infrastructure manager on a global scale, boasting over $150 billion worth of assets under its management – Brookfield Asset Management being the only firm outpacing this figure.

With government deficits on the rise, the demand for private financing for large-scale infrastructure projects has grown, and attractive investment subsidies may be key to meeting this need.

BLK's CFO, Martin Small, expressed that BLK's preference for acquiring GIP over opting for a traditional private equity buyout firm stems partially from the perception that the era of peak returns from private equity, facilitated by zero interest rates, might be on the decline.

BLK holds investments in several GIP funds, and there has been considerable competition for deals between the two entities. As Larry Fink propelled BLK to prominence in the field of traditional asset management, Adebayo Ogunlesi rose to head Credit Suisse's investment banking and fostered GIP in 2006 with his pool of fellow alumni from the now-defunct bank, who will also join BLK.

Acquiring GIP will promptly double BLK's management fees from private markets, highlighting that Fink appears to have found the prominent deal he has been seeking.

Nevertheless, BLK, as a publicly traded asset manager, faces the necessity to delicately balance the retention and motivation of GIP's top talent with the interests of its shareholders.

As part of striking a balance, it was decided that BLK would receive all the management fees on GIP funds in addition to 40% of the performance fees accruing from all future funds. GIP employees would retain all the carried interest in its existing funds and those slated for future raising.

To acquire GIP, BLK agreed to an amount of $3 billion in cash and 12 million of its shares, approximately equating to around $9.5 billion.

GIP is predominantly owned by its six founding partners, who will collectively ascend to become some of BLK's most significant shareholders, possessing about 8% of its outstanding shares.

BLK intends to distribute 7 million shares to the six GIP founders immediately and will add 5 million more in five years. A portion of this equity will be allocated to employees as a part of a retention strategy. As a result, the collective GIP team will ascend as the second-largest shareholder in BLK, binding them to the ongoing fortunes of their new proprietor.

But why is BLK pouring billions on infrastructure?

The evolution of the intervention of private investors in infrastructure began during the 1990s and early 2000s. Western governments burdened with mounting debts sought private investors to purchase and overhaul outdated infrastructure, from airports to water pipelines. Subsequently, numerous companies across industries, from energy providers to telecom operators, started selling assets such as pipelines and cell towers to these investors.

Presently, the demand for infrastructure investment is escalating, fueled by three significant trends:

  1. Decarbonization: In order to achieve global climate objectives, approximately $8 trillion is required to be spent on developing renewable energy infrastructure, storage batteries and transmission lines within this decade. Significant investments are also needed in hydrogen facilities to manufacture carbon-free fuel for aviation and maritime transport and in carbon capture technology.
  2. Digitization: While the software is increasingly dominating the world, it relies heavily on tangible assets, including fiber-optic cables, 5G networks, and data centers.
  3. Deglobalization: A shift in supply chains away from China has spurred demand for capital-intensive factories and new transport infrastructure to facilitate overland and sea freight movement. This trend has been further galvanized by increased calls for energy security in Europe following Russia's incursion into Ukraine, stimulating the construction of liquefied natural gas terminals to import fuel from less aggressive nations.

This skyrocketing demand for investment coincides with an era where government and corporate balance sheets are under significant stress. America's federal debt, nearing $34 trillion, is projected to continue snowballing throughout the following years. Additionally, several European governments face daunting debt burdens.

Rising interest rates have made these liabilities more burdensome to service and pose challenges to corporations that have capitalized on inexpensive debt to boost shareholder yields. Consequently, their capacity to finance substantial investments will be curtailed in the ensuing years. As a result, infrastructure investors are set to bridge this gap, having expressed their readiness and willingness to invest heavily.

Private equity groups anticipate growing their footprints in sectors like debt or infrastructure investment – sectors that are expected to profit from higher interest rates – either by incorporating public shareholders or merging with larger organizations. This approach extends beyond merely corporate buyouts, an area experiencing deceleration due to soaring financing costs.

The swift surge in interest rates has instilled caution among many investors, tempering commitment to fresh funds and stunting the utilization of existing ones. These prevailing circumstances present compelling reasons for independent firms to contemplate seeking out more substantial partners.

Fund managers hoping to benefit from the predicted influx of wealth from affluent individuals into private markets must heavily invest in novel products and distribution networks. Additionally, significant financial input into technology is essential to adapt to the advances in artificial intelligence.

The acquisition potentially furnishes BLK with a strategy to broaden its investment portfolio, thereby decreasing its vulnerability to market volatility. This is mainly due to the generally lower correlation that infrastructure investments bear with divergent asset classes and their reduced sensitivity to economic fluctuations.

Moreover, availing BLK of a comprehensive array of infrastructure assets could confer it with significant advantages. These mostly stem from those assets' capacity for long-term growth potential coupled with steady cash flows.

Following the acquisition, BLK is poised to emerge as a global leader, offering eminent infrastructure capabilities to its clientele. Clients who are persistently scouting for assets to counterbalance their extensive liabilities and diversify their portfolios may find solace in BLK's offerings.

Especially factoring in the prevailing economic conditions, this acquisition could prove to be a significant milestone for BLK. It would empower the company to effectively utilize its combined platform to capture a larger slice of the market share, churn superior returns, and seamlessly address the growing challenges and demands of its clients amidst the swiftly transforming infrastructure landscape.

Bottom Line

Throughout 2023 and well into 2024, two key trends have emerged within the financial sector: the escalating importance of private capital for infrastructure projects and the growing appeal of infrastructure assets amid economic uncertainty.

The recent landmark deal acts as a quintessential example of the consolidation trend that industry insiders have been forecasting. BLK has strategically secured a robust position in a market valued at $1 trillion today. Moreover, infrastructure is projected to be one of the most rapidly expanding segments of private markets in the foreseeable future.

While some caution against possible cultural discrepancies and potential conflicts of interest, the early market response to the deal appears stable. Shares of BLK surged by 1.3% immediately after the announcement.

Mr. Fink maintains his belief that the driving force behind their acquisition strategy has always been growth. With the acquisition of GIP, he firmly believes a similar scenario will likely play out. The efficacy of Mr. Fink’s belief is pertinent not just for BLK's shareholders but also for the entire industry that has billions invested in this premise.

The main query for BLK is whether this deal will finally serve as the key to unlocking a sector where it has previously found it challenging to gain substantial traction.

Besides the acquisition, there are numerous factors investors should consider during their assessment of the company. However, it might be prudent for them to wait and assess how this deal plays out.

Therefore, keeping BLK on the watchlist might be prudent at this juncture.

Earnings Season Preview: What Lies Ahead for Banking Stocks?

Financial institutions offer various consumer financial services, encompassing current and savings accounts, online payment options, credit and debit card facilities, residential and commercial lending options, insurance coverages, and investment portfolio management. Robust consumer spending and business investment activities propel demand for these financial services.

The third-quarter earnings season will kick off with big banks this week. As banking and finance sector giants JPMorgan Chase & Co. (JPM), BlackRock, Inc. (BLK), WaFd, Inc (WAFD), and Unity Bancorp, Inc. (UNTY) prepare to release their results, we look at what analysts expect and what could shape their prospects.

Before delving into the financial prospects of these stocks, let’s discuss the factors influencing the industry’s trajectory.

The financial sector, particularly the banking segment, has demonstrated signs of stabilization following the turmoil induced by the collapse of the regional banks. The recovery coincides with the Federal Reserve's benchmark interest rate hikes to its peak in over two decades, aiming at alleviating inflationary pressures.

In September, record-breaking 334,000 nonfarm payroll additions surpassed economists' forecasts and brought increased potential for further rate increases. This comes as an overheated job market must be balanced by cooling inflation to achieve a desirable economic "soft landing." Higher interest rates could prove advantageous to banks, typically resulting in higher net interest income.

However, the market sentiments surrounding banking stocks have been negatively impacted by the downgrades and warnings issued by top rating agencies — Moody's and Fitch. These actions have gravely spotlighted investors' anxieties concerning the industry's stability and future. Similarly, S&P Global reduced its credit ratings and outlook for several U.S. regional banks, marked by their considerable commercial real estate (CRE) exposure.

This action could lead to increased borrowing costs for the banking sector, battling to recover from previous upheavals. Furthermore, with the Fed’s interest rate hikes raising borrowing costs, banks find themselves in a situation where they must offer higher interest on deposits to retain customers considering more lucrative alternatives.

In the forthcoming weeks, the financial sector, representing more than 40% of the S&P 500 members, is set to dominate market discourse, as it is slated to reveal third-quarter earnings. According to a Factset article, the sector is predicted to record the fourth-highest quarterly earnings growth rate at 8.7% among 11 sectors.

The banking industry is anticipated to report the third-highest annual earnings growth rate at 4%. Diversified Banks are expected to achieve an earnings growth of 7% on a sub-industry level, whereas Regional Banks may report a 15% decline in earnings. Within the Capital Markets industry, Asset Management and Custody Banks are projected to record earnings growth.

Let’s now comprehend some factors that could influence the featured stocks in the near term:

JPMorgan Chase & Co. (JPM)

JPM has proven its robustness and keen strategic foresight in the past few years, preparing tactically for a high-interest rate environment by stockpiling cash starting in 2021. Their fiscal prudency awarded them an advantageous position to acquire First Republic Bank under desirable terms following its seizure by federal regulators earlier this year.

The second quarter saw a surge in JPM's revenue and net income, boosted by higher interest rates and the well-timed acquisition of First Republic Bank. These successful endeavors are testaments to the bank's competent management and foresight.

Looking forward to the imminent week, JPM is expected to exceed expectations with its third-quarter earnings – a result of excellent performance across its primary business sectors.

According to data compiled by Bloomberg, the banking giant stands ready to record the fastest earnings-per-share growth compared to other major U.S. investment banks this reporting season.

The slump in trading revenues and investment banking fees was offset by the bank's net interest income increase of 27% during the quarter. According to Piper Sandler, despite persistently high interest rates, the bank might surpass its annual net interest income guidance.

For the fiscal third quarter ending September 2023, JPM’s revenue and EPS are expected to increase 20.2% and 24.8% year-over-year to $39.31 billion and $3.89, respectively.

Beyond these impressive forecasts, it is noteworthy that JPM surpassed consensus revenue and EPS estimates in each of the trailing four quarters.

BlackRock, Inc. (BLK)

BLK is recognized globally as a top-tier provider of investment, advisory, and risk management solutions, risks facing adversity due to escalating interest rates. An upward trajectory in interest rates stands to diminish the demand for bonds and fixed-income securities, which serve as substantial income generators for BLK.

As interest rates climb, bond prices take a downturn, prompting investors to explore other asset classes or seek out richer yields in alternative locations. This scenario can potentially depress the value of BLK’s assets under management (AUM) and any fees garnered from managing these assets.

Further concerning is that BLK leans heavily on debt to fuel its operations and fund acquisitions. As of June 30, 2023, the firm registered $7.96 billion in total long-term borrowings. For the six months that ended June 30, 2023, BLK paid approximately $89 million in interest on long-term notes.

The firm's EPS is projected to take an 11.5% year-over-year plunge to $8.45 for the fiscal third quarter ending September 2023 as it grapples with decelerating institutional flows and the impacts of foreign-currency headwinds.

On a brighter note, the company’s revenue for the same quarter is forecasted to increase 5.6% year-over-year to $4.55 billion. The company topped consensus EPS estimates in the trailing four quarters and consensus revenue estimates in three of the trailing four quarters.

WaFd, Inc (WAFD)

Regional bank WAFD offers various financial products and services, encompassing current and savings accounts, mortgages, loans, and investments.

A potential rise in interest rates could boost the bank’s net interest income, as evidenced by its third-quarter net interest income results that reached $168.70 million, marking an 11.2% year-on-year increase.

Over the past three years, the bank has achieved impressive growth, with EPS escalating by 18.3% CAGR. If WAFD maintains this trajectory, shareholders should be thoroughly satisfied.

Furthermore, over the past three years, the company's revenue and net interest income expanded at CAGRs of 9% and 13.8%, respectively, highlighting the solid caliber of WAFD’s growth.

One point of concern lies in the bank's substantial reliance on debt. For the last reported quarter that ended June 30, 2023, WAFD reported borrowings of $3.60 billion at an interest rate of 3.76%.

Moreover, for the fiscal fourth quarter ending September 2023, WAFD’s revenue is anticipated to decline 4.3% year-on-year to $180 million, while EPS is expected to decline 16.2% year-over-year to $0.90.

Unity Bancorp, Inc. (UNTY)

UNTY, a community-oriented bank in Clinton, New Jersey, is well-positioned to capitalize on its robust fundamentals, solid loan and deposit balances, and diverse fee-income sources.

It is a conservatively managed organization that has constantly been acknowledged as a top-tier community bank. Although not exempt from the challenges faced by the broader banking sector, UNTY seems well-prepared to confront these difficulties while retaining the confidence and favor of the communities it serves.

The bank's revenue and net interest income expanded at CAGRs of 14.8% and 17%, respectively, over the past three years, justifying its strong growth trajectory.

UNTY's main earnings source, net interest income, decreased marginally sequentially by $0.4 million to $23.5 million. The decline was due to the cost of interest-bearing liabilities rising faster than the yield of interest-earning assets, causing a slight decrease in net interest margin to 4.04%.

Mixed analyst estimates about the company’s potential are evident as UNTY’s EPS is expected to decline 4.3% year-on-year to $0.89, while its revenue is expected to increase 1.2% year-over-year to $25.15 million for the fiscal third quarter ending September 2023. Moreover, the stock has topped the consensus EPS and revenue estimates in three of the trailing four quarters.

Furthermore, UNTY experiences rapid growth and has strategically chosen to pay out a minimal fraction of its earnings as dividends to shareholders, opting instead to reinvest back into the business. This approach promises to generate significant value for investors over time. Over the past three and five years, UNTY's EPS has grown at CAGRs of 22.4% and 19.2%, while dividend payouts grew at 13.7% and 12.6% over the same periods.